Dollar Tumbles on Tepid May Inflation Report

The US dollar suffered a decline on Thursday after data showed a weaker-than-expected increase in inflation for May. The softer inflation numbers raised concerns about the Federal Reserve’s future interest rate path and dampened expectations for aggressive monetary tightening. According to the Bureau of Labor Statistics, the Consumer Price Index (CPI), a widely-tracked measure of inflation, rose by 0.1% in May, below economists’ estimates of 0.5%. The annual inflation rate slowed to 8.6% from 8.3% in April, marking the first decline in over a year. The core CPI, which excludes volatile food and energy prices, also showed a modest increase of 0.3% in May, against market expectations of 0.4%. The annual core inflation rate held steady at 6%, indicating that underlying inflationary pressures are still elevated. The weaker inflation numbers suggest that the recent surge in inflation may be starting to moderate. This could give the Fed some room to slow down the pace of its interest rate hikes, which have been aimed at combating inflation. The market reaction to the inflation data was swift. The dollar fell sharply against major currencies, including the euro and the Japanese yen. Treasury bond yields also declined, reflecting expectations for a less aggressive tightening cycle by the Fed. “The inflation report is a bit of a relief for the market,” said Mark McCormick, a portfolio manager at Russell Investments. “It suggests that inflation may have peaked and that the Fed may not need to be as aggressive in raising rates.” However, analysts cautioned that the dollar’s weakness could be short-lived if inflation remains stubbornly high in the coming months. The Fed has signaled that it will continue to raise rates until it sees a sustained decline in inflation towards its 2% target. Despite the dollar’s recent weakness, it remains a relatively safe haven currency in times of global economic uncertainty. Investors are likely to continue monitoring inflation data closely and assess its implications for the Fed’s monetary policy stance and the dollar’s outlook.Inflation Data Triggers Dollar Plunge, Raises Expectations for Interest Rate Cuts

Inflation Data Triggers Dollar Plunge, Raises Expectations for Interest Rate Cuts

The dollar witnessed a significant decline on Wednesday following the release of consumer price index (CPI) data for May, which showed a smaller-than-anticipated rise. This development fueled speculation that the Federal Reserve might begin reducing interest rates as early as September. Headline inflation remained stable for the month, falling short of economists’ forecasts of a 0.1% increase. Additionally, core prices experienced a 0.2% increase, also below projections of a 0.3% rise. “The report should provide the FOMC with some additional degree of confidence in the disinflationary process toward the 2% target,” said Michael Brown, market analyst at Pepperstone in London. According to the CME Group’s FEdWatch tool, Fed funds futures traders now assign a 73% probability to an interest rate reduction by September, up from 53% on Tuesday. “That September meeting is now back on,” said Helen Given, a currency trader at Monex USA in Washington, D.C. Expectations of a second rate cut by year-end have also increased. “Traders are expecting two interest rate cuts this year. That’s a pretty notable change even from yesterday’s prices,” Given added. Investors had previously lowered expectations for rate cuts after the May jobs report released on Friday indicated that employers added more jobs than expected, while wage inflation also rose more than anticipated. However, Wednesday’s data may give Fed Chair Jerome Powell “a little bit of ground to lean a little more dovish than he might have done previously. And that’s been a trend we’ve seen from him this year,” Given said. The dollar index dropped 0.83% to 104.39, after reaching a four-week high of 105.46 on Tuesday. The euro gained 0.82% to $1.0827, recovering from Tuesday’s low of $1.07195. The euro had been facing pressure after far-right parties gained ground in European Parliament elections, leading French President Emmanuel Macron to call for early elections in his country. Macron reiterated on Wednesday that he would not resign if his side fails to win the election. The Bank of Japan also held its meeting this week and was widely expected to maintain interest rates and consider providing clearer guidance on its plans to reduce its balance sheet. The dollar declined 0.71% to 155.95 yen. In cryptocurrency markets, Bitcoin rose 2.88% to $69,202.The US dollar weakened against major currencies on Friday after data showed that inflation in May was weaker than expected. The consumer price index (CPI) rose by 8.6% year-over-year in May, down from 9.4% in April. This was below the 8.8% increase that economists had forecast. The core CPI, which excludes food and energy prices, rose by 6.0% year-over-year, down from 6.2% in April. This was also below the 6.1% increase that economists had forecast. The weaker-than-expected inflation data raised hopes that the Federal Reserve may not need to raise interest rates as aggressively as previously thought. This led to a sell-off in the US dollar, which fell against the euro, the yen, and the British pound. The euro rose to $1.0700, its highest level since early May. The yen rose to 131.70 per dollar, its strongest level since June 2022. The British pound rose to $1.2640, its highest level since late February. The weaker dollar could help to boost exports from the United States, but it could also lead to higher prices for imported goods.